INTERPRETATION NOTE 3 (Issue 2) - SARS Home

1 INTERPRETATION NOTE 3 ( issue 2) DATE: 20 June 2018 ACT : INCOME TAX ACT 58 OF 1962 SECTION : SECTION 1(1) SUBJECT : RESIDENT: DEFINITION IN RELATION TO A NATURAL PERSON ORDINARILY RESIDENT Preamble In this Note unless the context indicates otherwise non-resident means any person who is not a resident as defined in section 1(1); section means a section of the Act; tax treaty means any agreement entered into between the governments of the Republic and another country for the avoidance of double taxation ; the Act means the Income Tax Act 58 of 1962; and any other word or expression bears the meaning ascribed to it in the Act. All INTERPRETATION notes referred to in this Note are available on the SARS website at Unless indicated otherwise, the latest issue of these documents should be consulted. 1. Purpose This Note explains the meaning of the term ordinarily resident as referred to in relation to a natural person in the definition of resident in section 1(1).

2 2. Background South Africa has a residence-based tax system. Persons who are resident in the Republic are taxed on their worldwide income, subject to certain exclusions. Non-residents are taxed only on their income from a source within the Republic. A natural person is a resident for income tax purposes if the natural person is ordinarily resident in the Republic;1 or meets all the requirements of the physical presence test,2 and is not deemed to be exclusively a resident of another country for the purposes of the application of any tax treaty. 1 Paragraph (a)(i) of the definition of resident in section 1(1). 2 Paragraph (a)(ii) of the definition of resident in section 1(1). 2 This Note focuses solely on how to determine whether a natural person is ordinarily resident in the Republic. For more information on the physical presence test, see INTERPRETATION Note 4 Resident: Definition in Relation to a Natural Person Physical Presence Test.

3 3. The law The term resident , as defined in section 1(1), is quoted in the Annexure. 4. Application of the law The enquiry into whether a natural person is resident in South Africa for income tax purposes commences with determining whether that person is ordinarily resident in the Republic, since the physical presence test does not apply if a natural person is ordinarily resident in the Republic. The Act does not define the term ordinarily resident . The courts have, however, considered its meaning and have established principles to be applied in determining the place in which a natural person is ordinarily resident (see ). Case law on ordinarily resident In Cohen v Commissioner for Inland Revenue,3 the court had to decide whether a natural person who had not been physically present in South Africa for the entire year of assessment could be ordinarily resident in the Republic. The taxpayer, who was domiciled in South Africa, had during 1930 to 1940 frequently travelled abroad to the United States of America (US), England and Europe on business, spending about half of his time in South Africa and returning to South Africa after the business trips.

4 In 1940 the taxpayer applied to the Overseas Permit Officer for permission to leave South Africa in order to travel with his family to the US and Canada for business purposes. The permit was initially granted for a nine-month period but was subsequently extended for a further 12 months. It was always accepted that the visit was temporary and that the taxpayer and his family would return to their home in South Africa. To this end, the taxpayer s flat, which had been leased for five years and contained his own furniture, was sub-let for the period of his absence. In finding that the question regarding whether a natural person was ordinarily resident was one of fact and that there was evidence upon which the Special Court was entitled to come to its finding, Schreiner JA stated the following regarding ordinary residence:4 ..it seems to me that the question whether he was in that year an individual not ordinarily resident in the Union is essentially a question of degree to which no single, certain, answer could be given; the answer depends on the weight to be given to the various factors set out in the stated case.

5 The court also held that ordinary residence was not determined solely by the facts applicable to the particular year of assessment and that it does not exclude the investigation of [the taxpayer s] mode of life before, or even after, that year .5 In addition, the court found that a natural person could be ordinarily resident in a 3 1946 AD 174, 13 SATC 362. 4 At SATC 362 at 366. 5 Cohen v CIR 1946 AD 174, 13 SATC 362 at 373. 3 country for a year of assessment even if that person was physically absent from that country for that entire year, and stated that it would certainly be giving to residence a special or technical, indeed a highly artificial meaning, if one required the physical presence to have existed during the year of assessment .6 The taxpayer was found to be ordinarily resident in the Republic. Schreiner JA expressed the view that the precise effect of the word ordinarily in ordinarily resident may be linked to whether a man could be ordinarily resident in more than one country at the same time.

6 Although Schreiner JA felt that it was unnecessary for the purposes of the case to decide on whether a natural person could be ordinarily resident in more than one country at the same time, he discussed, obiter, what ordinarily resident could mean if that was the case:7 If, though a man may be resident in more than one country at a time, he can only be ordinarily resident in one, it would be natural to interpret ordinarily by reference to the country of his most fixed or settled his ordinary residence would be the country to which he would naturally and as a matter of course return from his wanderings, as contrasted with other lands it might be called his usual or principal residence and it would be described more aptly than other countries as his real home. The approach in Cohen s case was followed in ITC 11708 in which a taxpayer, who was sent by his employer to the US on a 14-month assignment to obtain experience to be applied in South Africa, was held to be ordinarily resident in the Republic.

7 The taxpayer retained his house in South Africa and rented it out for the exact period of his assignment overseas. The taxpayer s wife and two children accompanied him but his parents remained in South Africa, his permanent employment was in South Africa and he had bank accounts in South Africa. Although he entertained the possibility of remaining overseas, there was no definite decision in this regard and no other country was regarded as his ordinary residence. In Commissioner for Inland Revenue v Kuttel,9 the taxpayer decided in May 1983 to emigrate from South Africa and, having obtained a permanent residence permit, left for the US on 29 July 1983. The taxpayer and his wife established a home and an office in the US, joined a local church, opened bank accounts, bought a car and registered for social security. The three children, in high school in 1983, initially remained in South Africa to complete their schooling but thereafter permanently joined their parents in the US.

8 Subsequently, when permitted under US regulations, the parents and children became US citizens. Exchange control regulations meant the taxpayer was forced to retain substantial assets in South Africa. The taxpayer retained the family home in Llandudno, which was owned by a company in which he and his wife held the shares, and in order to protect his assets from a devaluation in the value of the rand, amongst others, effected renovations and extensions to the house. During the 31-month period under review, the taxpayer spent on average approximately one-third of his time in SA, which had become progressively less towards the end of the period. 6 At SATC 362 at 373. 7 At SATC 362 at 371. 8 ITC 1170 (1971) 34 SATC 76 (C). 9 1992 (3) SA 242 (A), 54 SATC 298. 4 Goldstone JA stated that 10 a person may have more than one residence at any one time is clear.

9 In the present case we are concerned with the words ordinarily resident . [Ordinary residence] is something different and, in my opinion, narrower than just resident . In his judgement Goldstone JA agreed with the meaning attributed to ordinary residence by Schreiner JA in Cohen v Commissioner for Inland Revenue11 and stated:12 I can find no reason for not applying their natural and ordinary meaning to the provisions now under consideration.. I would respectfully adopt the formulation of Schreiner JA and hold that a person is ordinarily resident where he has his usual or principal residence, ie what may be described as his real home. In applying the meaning of ordinarily resident indicated above to the facts of the case, the taxpayer was held not to be ordinarily resident in the Republic. The application and INTERPRETATION of the facts can be reviewed in detail in the judgement.

10 I n summary, the court found that following the decision to emigrate to the US in 1983, the taxpayer had set up his home in the US and that the subsequent visits to South Africa for business and personal matters (for example, children initially at school, family, yachting interest) were not unreasonable or incompatible with his real home being in the US. In Robinson v Commissioner of Taxes,13 the meaning of the word residence (and not that of ordinarily resident ) was examined. The case focussed on the physical presence of a natural person, which exceeded that of a casual visit, as a crucial requirement in the determination of residence. The taxpayer also maintained a home which was an important factor in deciding that he was resident in South Africa but the court indicated the maintenance of an establishment may not be necessary in all cases. Residence is an element of ordinary residence so the case is relevant, but there are differences which need to be taken into account.